Transaction costs, industry experience and make-or-buy decisions in the population of early U.S. auto firms

Lyda S. Bigelow and Nicholas Argyres

Journal of Economic Behavior & Organization, 2008, vol. 66, issue 3-4, 791-807

Abstract: We study the determinants of make-or-buy decisions for engines made by every recorded U.S. auto firm during 1917-1933. Most make-or-buy studies testing predictions of transaction cost economics exclude smaller firms, even though their make-or-buy behavior might be different from large firms' due to capital constraints or other factors. We find that transaction cost effects on make-or-buy choices were nevertheless important at the population level. We also find that firm experience in the industry, as well as pre-entry experience, significantly affected make-buy choices. These experience effects may reflect the interaction of mechanisms emphasized in evolutionary and transaction cost theories.

Date: 2008
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